Oil drops after EIA recommends easing ethanol blend requirements

Another Brick

All and all it's just another brick in the wall. Blend-wall that is! Oil futures (NYMEX:CLZ13) continue to the down side after the Environmental Protection Agency announced its long awaited recommendation on the easing of ethanol requirements in gasoline. With the so-called blend-wall fast approaching, the EPA blinked before we crashed. Rising renewable fuel credits that refiners have to buy were driving up gas prices and forcing refiners to produce E-15, a fuel that no one really wants except the ethanol lobby. Oil was unmoved because of the rising amount of supply, but corn sold off a bit.

The EPA as expected called for U.S. refiners to add 12.7 billion to 13.2 billion gallons of ethanol with gasoline in 2014. The Renewable Fuels Standard law in 2007, called for 14.4 billion gallons be blended into gasoline next year. The problem is that U.S. gas demand is falling, so this drove the price of credits through the roof.

The Wall Street Journal reported that "That is about 16% less than what Congress specified in a 2007 renewable fuels law. The ethanol mandate was set at a time when demand for gasoline was expected to continue to rise, but instead it has fallen on increased vehicle efficiency and a struggling economy. EIA data show gasoline demand peaked in 2007 near 9.3 million barrels a day and is expected to average near 8.7 million barrels a day this year and next. That left refiners to struggle to blend increasing volumes of ethanol into a shrinking gasoline pool, or buy costly credits for ethanol volumes they couldn't produce.

The global oil market will watch with interest talks with Iran that will resume this week. The Financial Times reports "Israel escalated its rhetoric over Iran's nuclear program at the weekend, with a senior official warning it was prepared to launch a unilateral military strike against Iran. Although Israel has talked many times about its willingness to take military action on its own, this warning comes ahead of diplomatic talks with Iran on Wednesday that US officials say are "close" to success."

Natural gas is rallying as winter is freezing out the bears. Many weather forecasting models are now predicting colder than average temperatures in key gas-consuming regions in the U.S., meaning demand will exceed last week's expectations.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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